Dodd and Frank: The Dukes of Moral Hazard

By:  Michael Tennant
11/08/2012
       
Dodd and Frank: The Dukes of Moral Hazard

According to the text of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the law is supposed “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ [and] to protect the American taxpayer by ending bailouts.”

According to the text of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the law is supposed “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ [and] to protect the American taxpayer by ending bailouts.”

However, as is usually the case with federal laws, Dodd-Frank does precisely the opposite. “In fact,” reports the New York TimesGretchen Morgenson,

Dodd-Frank actually widened the federal safety net for big institutions. Under that law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits. At the same time, those eight may avoid Dodd-Frank measures that govern how we’re supposed to wind down institutions that get into trouble.

In other words, these lucky eight got the best of both worlds: access to the Fed’s money and no penalty for failure.

The eight institutions in question are clearinghouses, which Morgenson describes as “large, powerful institutions that clear or settle options, bond and derivatives trades.” Among them are the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), and the Options Clearing Corporation (OCC), all of which handle billions of dollars’ worth of transactions a day. They are “lucrative businesses,” Morgenson observes. “Last year, the CME Group, the parent company of the Chicago Mercantile Exchange, generated almost $3.3 billion in revenue. Its chief executive, Craig S. Donohue, received $3.9 million in compensation and held an additional $10 million worth of equity awards outstanding, according to the company’s proxy statement.”

These clearinghouses predate Dodd-Frank; the oldest, the CME, was founded in 1898. But the law has vastly expanded their involvement in the financial system and correspondingly increased taxpayers’ risk, according to Peter Wallison of the American Enterprise Institute:

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